After a slow start to the year, Canadian economy picks up speed in May

OTTAWA – Canada’s economic output picked up speed to a a 0.4 per cent pace in May, setting the stage for a second quarter expansion that is expected to help reverse the year’s slow start.

Economists had anticipated May would show signs the economy was putting the weak start to 2014 behind it, especially since the U.S. reported Wednesday that its output had grown by four per cent annualized during the April to June period.

But the May uptick was a little faster than even analysts had anticipated, suggesting a second quarter number of 2.5 per cent that will be bigger and in line with what had previously been considered an overly optimistic forecast by the Bank of Canada.

Analysts said the result takes the sting out of the first quarter slowdown to 1.2 per cent annualized growth and the unexpectedly weak 0.1 per cent monthly gain of April that had economists downgrading expectations for the second quarter as well.

“Looking further ahead, yesterday’s stronger-than-expected preliminary U.S. real GDP reading, combined with an improving U.S. labour market, confirms our expectation of an acceleration in economic activity stateside,” TD Bank economist Jonathan Bendiner said in a note to clients.

“This augurs well for Canada’s export sector, which will increasingly be relied upon to fuel economic growth as domestic sources of growth are likely to wane.”

There is already evidence the strong U.S. bounce is lifting Canadian economic activity.

The big winner in May was goods production, which rose 0.5 per cent and especially the auto sector that is dependent on exporting to the U.S. market. The auto assembly industry advanced by 13.5 per cent.

Overall, the troubled manufacturing sector, which is also export dependent, had a good month with a gain of 0.8 per cent from April.

While the results were encouraging for the Canadian economy ahead, analysts said they were unlikely to influence the Bank of Canada’s position on interest rates since they are in line with its expectations.

More critical to the bank’s decision on when to start raising rates will be what occurs in the U.S. and whether the Federal Reserve moves up their plans to tighten interest rates. Most analysts believe that, given the dropping unemployment rate and accelerating economy, the Fed may move as early as mid-2105, which could also force Canadian bank governor Stephen Poloz’s hand.

May’s result constituted the fifth consecutive month that GDP has risen in Canada.

Aside from manufacturing, the mining, oil and gas sector also showed strength, advancing by 0.7 per cent with crude oil production leading the way. Mining activity excluding oil and gas fell 1.5 per cent, however, due to maintenance activities.

Construction picked up in May by 0.5 per cent following two consecutive declines.

Meanwhile, the service sector increased by 0.4 per cent.

In a separate report, Statistics Canada said weekly earnings in Canada had risen by 2.6 per cent in May over the past year, slightly ahead of the current inflation rate. As well, the agency said non-farm payroll employment had increased by 158,500, or one per cent, over last May, a higher level of job creation than tracked by the more often quoted labour market survey.